Thursday, August 29, 2013

There are few times that the need for an article refuting a Forbes colleague is in need of publishing, but this is one of those instances. Beyond statements from the Astros and club president Reid Ryan saying that the article was factually incorrect—something that could smack of protectionism—the fact is, the Astros are not the most profitable MLB club in history. As well, they are most assuredly not even the most profitable this year. In a case of ensuring that as the initial story weaves its way across the internet to other media, thus creating revisionist history, here are the reasons why the story is not only off-base, it has to be classified as grossly inaccurate.

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Not surprised to see this. Important points about the problems with CSN Houston and also does a good job of summarizing the Astros plan, the success of which can't be determined until we see what ownership does in the next few years. And the author is certainly not a Crane apologist, either.

It's a really big deal when one writer gets called out like this by another writer at the same publication. Maury Brown is absolutely right in everything he's written here, and it's the right thing to do, but I'd be surprised if there wasn't a internal politics stinkbomb going off at Forbes right now.

The story was pitched to Forbes late Tues. Was given clearance. Wrote it yesterday. Published this AM. The only thing that has (currently) come my way from Forbes was ensuring I adhere to styleguide and use serial-caps in the title.

So where was the editor who is supposed to impose some level of quality-control? I understand the writer seems to be a business neophyte (with a long story in Forbes?), but isn't there someone at the magazine that is responsible for vetting something like this? It wasn't as if this was so tiemly that they had to rush it out. I wouldn't be surprised if there isn't a firing or 2 at the publication, before this story passes.

If this is going to be a real take-down, can we get a reasonable profit estimate then? "According to sources with knowledge of CSN Houston, the first few years of the broadcast agreement do not come anywhere near $80 million annually." Okay, are they $60 million? $30? $0? How much are central revenues? They're not the most profitable club this year - who is? How do you know without doing some math?

I like Maury and he does good work, but as rebuttals go, this one seems short on facts and long on assertions, and it leaves several key questions unanswered ...

Beyond statements from the Astros and club president Reid Ryan saying that the article was factually incorrect—something that could smack of protectionism—the fact is, the Astros are not the most profitable MLB club in history. As well, they are most assuredly not even the most profitable this year.

This raises the obvious questions: Which team was the most profitable in MLB history, and which team, if not the Astros, will be the most profitable this year?

The article answers neither question.

Alexander was keen to bring in the broadcast revenues that allowed for his article to state the lofty (and erroneous) headline, but he certainly didn’t apply EBITA to Comcast SportsNet Houston. Regional sports networks ultimately are cash-cows, but there are substantial start-up costs associated to them. As one executive said to me, “It’s not uncommon to have start-up costs at or near $100 million for an RSN.”

The original article plainly stated that it treated the RSN's finances as separate for purposes of the article. Also, CSN Houston came into existence two years before Crane bought the team, so at least part of any such start-up costs were likely borne by Drayton McLane.

While the Astros will no longer be able to receive revenue-sharing due to market size,

This is incorrect. By 2016, the Astros, by virtue of being in one of baseball's top 15 markets, will be ineligible for revenue sharing, but they remain eligible in 2013 (with a 25 percent penalty), 2014 (50 percent penalty), and 2015 (75 percent penalty). [See p. 25. (PDF)]

Note: This is mostly academic, as the Astros were right on the edge of being a net payor or net recipient as of 2012.

For those that have followed my work on Forbes, they know that I have not always written favorably of Astros owner Jim Crane. Early on, I was one of his staunchest critics, and my prior story here on Forbes was cited as part of the reason Crane was not initially approved by MLB’s owners for the sale.

Jim Crane resisted moving the Astros to the American League, so the owners delayed the approval of Jim Crane. Once Crane relented, not only did MLB quickly approve him, but they gave him $35 million (!) toward the Astros purchase price.

Other analysts have cited the cutting of payroll to the bone as a matter of greed, so Alexander’s article is simply one more in the line.

The premise by which Crane and General Manager Jeff Luhnow are operating works like this: the minor league system was rated one of the worst when Crane purchased the Astros, and player contracts at the Major League level were inefficient in terms of gaining wins for the salary being spent. In a case of “pulling the Band-Aid off quickly,” MLB player payroll has been stripped to the axles and emphasis has been placed on building up the minor league system.

Whether the Astros' plan is driven by greed, the need to pay down debt, or Branch Rickey-level baseball genius is irrelevant to the Astros' bottom line — i.e., whether they're highly profitable or not. The above also ignores that the Astros really aren't spending all that much more than other MLB teams when it comes to "building up the minor league system." Indeed, not only have the Astros sat out the major international free agents since Crane took over, they've also traded away almost $1 million of their 2013–14 international signing money, an inexplicable move for a team (allegedly) going all-out in its build-from-within rebuilding process.

The Astros organization now has playoff teams at all four levels of the full-season minors (Oklahoma City, Corpus Christi, Lancaster, Quad Cities). The last organization to do this was the Texas Rangers in 2011. There are two additional Astros minor league clubs, Greeneville and Tri-City, that are currently in first place in their respective divisions, with an opportunity for playoff berths, as well.

After writing that the "minor league system was rated one of the worst when Crane purchased the Astros," this sounds impressive — until you realize the Astros' affiliates led all of MLB in winning percentage in 2012, with players who had been almost entirely inherited from the McLane regime. The Astros' minor league system has, indeed, made big strides in the past year, but this isn't the relevant measure of it.

Along the way, Crane has said he will not spend more than 50 percent of revenues on MLB player payroll, something that Commissioner Selig has said he’d like to see of all owners, as well. If Crane holds true to this, when revenues increase, and player development is fully righted, the club will increase player payroll to much higher levels.

The original article never claimed Crane would dare to maintain a $15M payroll forever, so this doesn't really refute anything.

While it is impossible to see whether the Astros will indeed spend as those revenues increase, there is at least one sign in the four-year contract given to second baseman, Jose Altuve. This was a wise move as Altuve is a prospect within the Astros system and would not become arbitration eligible until 2015. The contract covers his final pre-arbitration year and all three arbitration years. The option years in the contract cover two free-agent years. That aligns with at least part of Crane and Luhnow’s plan. The question will be if the practice continues in coming years.

Jose Altuve has logged 2.1 WAR in more than two full seasons in MLB, and he's currently at -0.1 WAR for 2013. Even if Altuve turns things around and this proves to be a smart deal, it doesn't tell us much of anything about the Astros' overall plan or Crane's willingness to spend money. At best, the deal saves the Astros money; at worst, it brought positive publicity in the middle of an abysmal season.

As noted, the Astros are not even remotely close to being the most profitable in history, let alone this year.

"Noted," but not remotely proved. And, again, Maury never gets around to telling us which MLB team will be the most profitable this year.

The 2013 Astros aren’t anything remotely what was portrayed. In that, the story is a massive strikeout. The Astros could eventually move into the upper [echelons] of profitability… somewhere in the distant future.

"Eventually"? Even if the Astros are getting just $20M in local TV money rather than the $80M claimed in the article, the Astros will still have revenue well north of $100M. While the original article's claim of "$99 million" in profits might be wrong, if not substantially wrong, the Astros will still be wildly profitable this year. If the Astros keep their payroll in the $15M to $20M range, they'll be wildly profitable next year, too, especially with each team's share of national TV revenue set to more than double from $23.72 million this year to $50 million next year.

Since MLB team financials are audited at a level that would only isfy an accountant at Enron, it is possible that everyone is wrong and the economic truth is impossible to ascertain.

I’m reminded of the 2002 kerfuffle on baseball’s finances amid the owners’ claims of losses. Twins infielder Denny Hocking said, “Gee, should I believe a magazine that spends 365 days a year researching finances, or a guy who has zero credibility (Selig) ?”

Not really. The precise profit numbers might be impossible to ascertain, but there's no way that sophisticated investors have whiffed on a hundred or more consecutive MLB team purchases. Jim Crane wasn't hellbent on buying an MLB team despite believing he might lose money.

Blue Jays President/CEO Paul Beeston, speaking years ago as Blue Jays VP:
"Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every nation's accounting firm to agree with me."

"Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every nation's accounting firm to agree with me."

My buddy the CPA says "Profit's an opinion; cash is a fact."

This kind of stuff always boggles my mind at the end of every month. I'm fairly certain the business I work for truly has no idea how much money they actually make or lose every year. Every month our P&L statement is chocked full of mistakes and misallocations that I don't know how the lights stay on.

This kind of stuff always boggles my mind at the end of every month. I'm fairly certain the business I work for truly has no idea how much money they actually make or lose every year. Every month our P&L statement is chocked full of mistakes and misallocations that I don't know how the lights stay on.

Yeah, I do too. Maury says the Astros aren't getting $80 million from the RSN, but doesn't say how much the Astros are getting. Without that detail, it's hard for me to understand what all the paragraphs about CSN Houston have to do with the original article.

The premise of the original article was that the Astros have had the most profitable year in MLB history. Even without the detail on how far below $80 million they are getting from the RSN, that's almost certainly untrue. This is like someone said Mike Moustakas is having the best offensive season ever, and you're skeptical of the counterargument because nobody told you how many doubles he's hit. The premise is so obviously flawed, and nearly everything you've been told is false, but hey, without knowing how many doubles...

I'd appreciate it if Maury could respond and fill in some of these points. While I agree with VI that Maury's article makes it seem unlikely that the Astros had the most profitable rule in history, it's scant on the sort of details that would really hammer the point home.

I completely understand that those details might have been removed for clarity/readability, but it'd be great if Maury could provide them if he had them.

The Ozanian pieces ran in Forbes magazine, which means they were carefully edited and fact-checked. The original article on the Astros (as well as Maury's follow-up) appeared on Forbes.com; apparently, once contributors are approved to put articles up on the Web site, they are barely reviewed at all by an editor, and not at all by a fact-checker. I say this not simply on the basis of these two pieces, but other ones I've read on the Web site, which sometimes barely rise above the level of incoherent mess.

Forbes obviously had a great reputation as a print magazine, but they seem determined to sully that with the anything-goes nature of Forbes.com.

The premise of the original article was that the Astros have had the most profitable year in MLB history. Even without the detail on how far below $80 million they are getting from the RSN, that's almost certainly untrue.

How so? Obviously, these are all Forbes' estimates, but if the prior record profit was around ~$48M (Cardinals), the original article could have been off by $50M and the Astros still could be the most profitable team in MLB history.

If Maury believes the $99M number was off and he felt compelled to correct the record, that's both fine and good. But the extent of the correction is the entire story here, and Maury doesn't present any numbers, either for the Astros or for whichever team he believes will be most profitable this year (since he claims it won't be the Astros).

Obviously, a lot of people are likely to see a $99M profit to be more egregious, for a last-place team, than a $50M profit, but the $99M number, in and of itself, wasn't what made this a big story this week. This turned into a big story because of the "horrible team is most profitable in MLB history" angle, which could still be true even if the $99M claim was off by as much as $50M. There's simply no way — none — that a team with revenues over $100M and an ML payroll of only $15M is anything but wildly profitable.

Forbes estimated the Astros' profit at $24.7M last year when it had a $61M payroll and $196M in estimated revenue. The Astros' attendance is currently down less than 800 fans per game, so there's no way they're taking a $45M revenue hit to offset the $45M payroll reduction. It's hard to see how the Astros' profit could be a dollar less than (a record) $50M this year, and it could easily be $70M, if Forbes' revenue estimates are in the ballpark.

"Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every nation's accounting firm to agree with me."

And sports guys are pikers in this regard when compared to the accounting geniuses in Hollywood.

Paramount claims they lost over $60million on Forrest Gump, after spending ~$50million to make it and "only" generating $600million in world wide box office receipts. The book's writer was owed a percentage of the profits, so Paramount said they didn't have to pay him anything (since it lost money).

Maury, as a fan of your work, I have to say it's a bit odd that Joe's posts here contain more specifics than your article does. Which isn't to suggest you're wrong so much as to echo the point made by others (Joe most specifically) that your article didn't really refute the central premise of the original article. If you have that additional information, it would be great to read.

As if it wasn't odd enough already to see one Forbes contributor aggressively refute another Forbes contributor, the above is a shot directly at Forbes executive editor Mike Ozanian. I'm not sure what Maury's up to, but ... wow.

What's weird about that is that the original Astros piece has nothing to do with the annual franchise valuations. And Maury must know that.

Right. I assume the original story was based at least in part on Mike Ozanian's research and revenue/expense estimates, but I thought Maury was simply disagreeing with the conclusion Dan Alexander presented. But for Maury to essentially endorse* a statement that labels Ozanian's work a "fraud" was really incredible.

(* I know "re-tweeting" a comment isn't necessarily an endorsement, but Maury certainly didn't push back against Kovacevic's description, either.)

Paramount claims they lost over $60million on Forrest Gump, after spending ~$50million to make it and "only" generating $600million in world wide box office receipts. The book's writer was owed a percentage of the profits, so Paramount said they didn't have to pay him anything (since it lost money).

Gump made 677 million worldwide but Paramount didn't see a ton of that money. Gump was out in domestic theaters for at least 42 weeks and it made almost 180 million after its first four weeks in the theater. After the first month or so the ticket sales share slides heavily towards the theater. It also made almost 350 million in international markets and Paramount would only get about 30 to 40% of that total at best.

So the movie probably cost them something lie 75 millionto make and promote and they took in about 280 to 300 million from the box office. Zemekis and Gump take their share which depending on whih tube of the internet you want to look at comes out to around 50 to 60 million each.

So while Gump most definitely made money it most certainly didn't make 10 to 12 times its cost.